Implementing Profit Participation in Videogames: The Challenges

Over the past couple of months, I’ve had many conversations with people in and around gaming expressing dissatisfaction with the business model in various ways. Developers are concerned about work expectations and job security, as well as upset that they don’t participate meaningfully in upside if a game is a big hit. Narrative designers similarly bemoan a lack of participation in the games that they work on - but also in potential multibillion dollar transmedia extensions featuring characters they created. Voice and mocap actors (and their agents) are similarly seeking a participation in success where they are recognizably depicted in games.

I couldn’t take a position as to whether creating a profit participation structure for creative participants would realistically be on the table. Games are generally becoming more expensive to produce, with longer development times, and the companies and their financiers are taking significant financial risk. I’m also not an expert in labor law or unionizing, and I have no idea if games talent would ever be successful in organizing (as has occasionally been mooted) in order to force some kind of profit participation or residual structure on the publishers. But I do know profit participation definitions better than most, and I can say that implementing such a system on a widespread scale would come with significant challenges:

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1. Who participates? In film and TV, backend is generally limited to a small pool of above-the-line (director, producers, actors). In certain contexts, department heads may have small participations (generally not on a preferred definition).??Other below-the-line is generally excluded. Where would you draw the line in gaming? Hundreds or thousands of people may work on a game, so who merits a participation? Games companies should probably brace themselves that A-list actors (and their agencies) will start pushing for profits in their deals if they are appearing recognizably, but are they really more important than the people actually making the game in this context? Based on anecdotal conversations I’ve had, celebrity likenesses don’t move the needle for gamers - great gameplay does.?

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1. Vesting. A triple A game can easily take 4-6 years to develop, or longer. In that time, employees and contractors might cycle on and off, or start on a project before moving on to other jobs. Sometimes games go back to square one and are wholesale redeveloped from scratch. When does a profit participation vest? How long does a qualifying participant need to render services to “earn” their participation? Does a developer lose their cut if they move on? These are all questions that would need to be answered, and positions that would need to be taken.

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1. Definition. Then you get to the definition itself. Clearly, the developer/publisher would need to recoup (plus interest/premium) before you get to breakpoint and payment of any form of participation. But what do they recoup - cost of production? Marketing? Overhead and related expenses? Is interest charged? How do you treat incentives? Do monies from ancillary and derivatives go into the pot? What about remasters and remakes? Are they included or separately accounted (the answers may differ). It can get complex quickly (good news for lawyers like me who have to decide and draft these things, but not necessarily everyone else).

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1. Imputation and Self-dealing. So you agree to account to participants based on profit. Easy right? Well, not so fast. What if the publisher also owns the distribution platform? Or what if you’re Microsoft and you put your games on Game Pass day one in order to fuel subscriptions. What do you impute as a license fee? That is a potential self-dealing question and is one of the key issues and questions in the lawsuits for “Bones” and “The Walking Dead” (see below). Fun times!

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1. Accounting. Accounting to dozens or hundreds of participants is a full time job in and of itself. Generally, participation statements are generated quarterly for a year or two, then sometimes semi-annually for a period, before becoming annual. Think about the tail of a game like The Witcher 3, or GTA 5. Those games have sold like gangbusters for a decade, which would mean you’d be accounting all that time. Games companies would have to hire many more accountants and participations specialists (which they may have to do anyway, if SAG-AFTRA gets its way).?

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1. Audit and Challenge. If you account to people, you have to allow them to audit you. Generally, participants can audit annually as long as the applicable audit period hasn’t passed. That can be immensely time consuming and expensive for all involved - and if you have a dispute, the next step is a lawsuit or arbitration. I doubt games wants its own “Walking Dead” or “Bones” dispute. It’s pretty much a cardinal rule in entertainment that if something is very successful, it will be audited and often litigated.

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1. Shareholder Considerations. Of course, it's accurate to say that nobody participates in the upside of a game. Shareholders do - which may include investors, management, sometimes employees with vested options, and (if the company is public) members of the public. Any profit participation to creative participants would presumably affect the return to shareholders, which may not be acceptable to them.
2. It’s broken elsewhere. The notion that creators should participate in success seems logical and fair. By contrast, the notion that you could play a key role in creating a billion dollar, cross platform franchise and not see another cent seems unjust. However, it’s not like gaming can point to film/TV as an unequivocally successful model here. Hollywood has been plagued by accounting disputes for decades, and now the industry has been brought to its knees in part by the issue of participation in streaming success (and, even more basic, what is “success” in streaming?). Moreover, many companies are moving away from true profit participation to a prenegotiated “per point” bonus system - in part to avoid audit headaches and potential lawsuits.?

?With that said, perhaps there is the opportunity here for gaming to create something new and better for the overall sustainability of the industry and wellbeing of everyone in it. It’ll be interesting to watch how everything evolves.?